Berkeley increases profit guidance after bumper six months

Berkeley Group built more houses than expected in the first half of the year, generated piles of extra cash and upped its profits guidance for the coming few years.

The London-focused housebuilder said it now would generate profit before tax of £3.3bn in the five years 2021, up from the £3.0bn initially indicated. Of this, £1.5bn PBT will be delivered in the two years to end-April 2019, approximately 60% weighted towards the current year.

For the six months ended 31 October, Berkeley completed 2,117 homes and achieved an average price average selling price of £719,000, up from £655,000 in the same period last year, to generate a 13.7% increase in revenues to £1.6bn.

Berkeley reported pre-tax profit of £533.3m for the six month period, an increase of 35.8% and ahead of most City analysts' forecasts, as gross margins increased to 36.7% from 35.6% and operating margins increased sharply to 31.8% from 27.7% thanks to a big fall in overheads. Earnings per share soared 40% to 316.6p as management continued to buy back shares.

Net cash was well ahead of most forecasts too, at £633m, and cash due on forward sales remained strong at £2.45bn, with the estimated gross profit in the land bank slipping to £6.0bn from £6.4bn as management remained selective in land purchases with five new sites added in the period, including two in the Midlands.

The FTSE 100 group has now returned to shareholders, or announced to be returned, £9.34 per share of £16.34 planned returns by the end of September 2021.

For the current year to 31 March 2018, so far £47.5m has been returned via share buybacks out of £139.2m total, with the amount to be returned as a dividend to be announced on 22 February 2018 and paid on 23 March 2018 to shareholders on the register on 2 March 2018, taking account of any further share buy-backs in the intervening period.

"Trading has remained in line with our business plan requirements over the first six months of the year, however, the dislocations in the market previously reported remain at large," said chief executive Rob Perrins. "Brexit uncertainty and concerns over growth and inflation, coupled with the changes to SDLT and mortgage interest deductibility, continue to impact the market."

REACTION AND ANALYSIS

Berkeley shares climbed more than 8% to 4,180p by mid afternoon on Friday.

Noting PBT was substantially above its £430m forecast, broker Canaccord said it was a "very strong" set of results that reflect the good investment made in land post the financial crisis and the strong London market in previous years, believing that consensus forecasts could move up by as much as mid to high single-digit percentages.

"Management remains selective in its land investment and expects to operate with neutral working capital given the uncertain outlook; it would seem sensible to manage financial risk carefully against the current macro backdrop.

"Clearly, the financial performance of the group will moderate from here with management confirming that it expects FY2018 profits to be a peak year. However, the strong results are once again testament to the quality of the group and its ability to deliver sustainable attractive returns as it effectively manages the housing cycle."

Analysts at Numis upgraded 2018 and 2019 estimates by 3% and 5% respectively, adding that: "The news that
Berkeley is taking a more cautious investment approach should also feed through to improved cash generation and we forecast that net cash by 2021 could amount to circa £1.2bn, even after the payment of its cash return pledge."

Seeing Berkeley as a "very high quality operator" with a strong landbank to support future growth and cash generation, the only thing weighing on sentiment was the need for "more clarity over the direction of the London housing market".

Ken Odeluga at City Index said management’s long-standing five-year profit guidance always looked like a lowball figure, given Berkeley’s position at the front of the trend of land banking, but the firm's recent caution reflects new political risks.

"The land bank issue was of course also one of the key reasons that shares of large housebuilders like Berkeley sold-off sharply at the end of October and into last month’s Budget. The statement confirmed Westminster’s hardening attitude over the hoarding of land by homebuilders," he said, pointing to Chancellor Philip Hammond’s recent announcement of a review into the reasons for "unused permissions" and other potential measures tilted to regional and smaller builders that suggest darkening prospects for larger outfits.

"Still, the top of the sector has recouped much of those losses in the weeks that followed, on a more discriminate assessment of the potential impact of the compulsory purchases which Hammond warned could be applied. Additionally, the distant prospect of regulation around unused permissions could still leave hoarders like Berkeley well-positioned relative to those that have reduced stored inventory, like Barratt," Odeluga said.